CD rates up to 14 percent: How to save like it's 1981

The 1980s were famous for many things…mullets, parachute pants, and phenomenal savings interest rates of 14 percent or more on CDs.

If your parents are fond of quoting vintage Saturday Night Live skits or they take time off work to catch the Psychedelic Furs reunion tour, they may also remember watching their savings ratchet up every month thanks to the great rates prevalent in that era. With those high interest rates now a distant memory, how is the current generation doing in terms of savings?

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A recent informal poll by SavingsAccounts.com found that most respondents felt that they are at least as good, if not better, at saving money as their parents. That sounds like good news, but does this perception match reality, and will it be enough to rescue the next generation from the retirement funding crisis now facing the country?

Comparing conditions in 2011 with those from 1981 provides some insights into how today's savers compare with those a generation ago, and how the challenge of saving for retirement has changed over time.

Poll results: Are you a better saver than your parents?

The SavingsAccounts.com poll found that 49 percent of respondents perceived themselves as doing a better job of saving money than their parents.

Another 22 percent said they were about the same as their parents when it comes to saving money, and only 30 percent responded that they were "worse" or "much worse" at saving money than their parents. In short, most respondents reported they are at least as good, if not better, savers than their parents.

Does perception match reality?

Americans do need to become better savers. According to the 2011 Retirement Confidence Survey from the Employee Benefit Research Institute, 70 percent of American workers report being behind on their retirement savings, and only 13 percent are very confident that they will have enough money for retirement.

So, if the SavingsAccounts.com poll suggests that a new generation of Americans are becoming better savers, it would help address this problem. The question is, does the perception of those poll respondents match the reality? Take a look at how 21st-century personal savings rates stack up against those from 30 years earlier.

According to personal savings data from the Bureau of Economic Analysis, Americans reached 2011 having saved an average of 3.48 percent of income over the previous 10 years. They had at least managed to drag the personal savings rate up to 5.8 percent by 2010, but even this doesn't come close to matching savings rates from a generation ago. Americans went into 1981 having saved an average of 9.63 percent over the prior 10 years.

So, perceptions aside, savings rates in the early 21st century are less than half of what they were a generation earlier.

Low interest rates make for a steeper savings challenge

This drop-off in savings rates is unfortunate, because today's savers face a much steeper challenge than their counterparts did 30 years ago. According to data from the Federal Reserve, 3-month CD rates were above 14 percent in early 1981. In early 2011, they were well below 1 percent. Savings account interest rates and money market rates have suffered similar declines.

Lower interest rates require you to save more to accumulate the same amount of wealth. If you could earn the 14 percent interest rates that were available in 1981, then by saving just $500 a year for 40 years, you would accumulate over $670,000 including the effects of compound interest. In order to amass a similar amount of wealth with deposits earning the 0.30 percent typical of today's rates, you'd have to up those annual savings to $16,000.

Median household income may have risen to roughly $50,000 today from $19,074 in 1981 (according to the U.S. Census Bureau), but most of that rise is due to inflation. Household income in 1981 was worth just over $43,000 in today's dollars, so the rise has been much milder than it appears--certainly not enough to make up for the precipitous drop in interest rates. So, savers today will have to put aside a much higher percentage of their incomes, simply because they won't get as much help from interest rates as the previous generation did 30 years ago.

New rules for retirement savings

How can you meet the challenge of overcoming low interest rates to save for retirement? Here are three key strategies:

Save more to make up for weak growth prospects. It's unlikely you'll have the easy ride your parents had when interest rates were booming. You'll need to start your savings plan with conditions as they are today.
Use a retirement calculator to estimate how much of your paycheck you'd need to save today to have the standard of living you want when you retire.
Keep expectations low. Factor in rates of return based on today's modest savings account interest rates and diminished stock market expectations.
Build regular savings into your monthly budget. With an automatic deposit into your savings account, a little money is set aside before it even hits your checkbook.

Use a retirement calculator to estimate how much of your paycheck you'd need to save today to have the standard of living you want when you retire.

Build regular savings into your monthly budget. With an automatic deposit into your savings account, a little money is set aside before it even hits your checkbook.

Get ahead during good times. Don't repeat one of the biggest mistakes made by the previous generation of savers. When interest rates and stock returns were high during the 1980s and 1990s, many of them took it as a cue to spend more rather than to build up a savings cushion. Get ahead when times are good, because leaner times are bound to follow eventually.

Choose the best savings accounts for your situation. You can't bring back the high interest rates of the early 1980s, but you can search and compare rates online to ensure you are getting the best return possible.
Just starting out? There's always a place for savings accounts in your financial portfolio, but for long-term growth, the stock market has historically outperformed bank accounts over the years. That's why almost all long-term retirement plans should include some exposure to the stock market, depending on your tolerance of short-term risk.
Growing family and career? Take advantage of the convenience and cost savings of online banking, direct deposit, targeted savings accounts, and the best interest rates offered.
Looking forward to retirement? The closer you are to retirement, the more of your savings should move into FDIC-insured savings accounts, money market accounts, and CDs.

Just starting out? There's always a place for savings accounts in your financial portfolio, but for long-term growth, the stock market has historically outperformed bank accounts over the years. That's why almost all long-term retirement plans should include some exposure to the stock market, depending on your tolerance of short-term risk.

Growing family and career? Take advantage of the convenience and cost savings of online banking, direct deposit, targeted savings accounts, and the best interest rates offered.

Looking forward to retirement? The closer you are to retirement, the more of your savings should move into FDIC-insured savings accounts, money market accounts, and CDs.

So if you think you're saving better than your parents did, congratulations, you are on the right track! But keep in mind that tough economic times could make it a long, slow journey to reach your savings goals compared to what your parents probably experienced. The sooner you start saving, and the more you save when you start, the better off you will be in your future.